May 11, 2009

Is there life after the crisis?

A lunch time talk by Niall Ferguson suggests a grim picture. Even if the world economy is not headed towards a 1930s-style catastrophe, it will remain mired in a "depression" like that experience in the 1870s, argues Ferguson, with long-term stagnation and deflation. This will be a bad time for everyone, except for populists and those who like to demonstrate in the streets.

The biggest winner? Ferguson suggests it may be China, who will supplant the U.S. as the global hegemon, as the U.S. replaced a similarly heavily-indebted Britain at the end of World War II.

I don't know about the China bit, but the rest is pretty scary. For a somewhat more cheery prognosis, you may want to turn to my latest Project Syndicate column, right here.

I agree with Niall Ferguson that the U.S. and the other advanced countries will not resume rapid growth anytime soon. With so many trillions of asset destruction, consumption growth will remain slow for a while, as will the process of finding another engine of growth to replace finance.

But as far as the developing nations are concerned, this need not be a tragedy. After all, their growth depends on their ability to import and deploy the stock of knowledge that already exists in the rich world--a stock that will not disappear or dissipate just because growth there has slowed down.

And as long as the de-globalization in question is simply a reversion to something like what we experienced in the 1960s and 1970s rather than the 1930s, the opportunities for convergence will still be there.

What will be ruled out of course is the kind of strategy that depends on external demand to increase the supply of domestic non-traditional tradables (manufactures, tradable services, and non-traditional agricultural products). This kind of undervaluation-cum-trade surplus strategy needs to be replaced by one that relies much more on domestic demand.

As I explain in my column, it is possible to spur the production of tradables without generating a trade surplus. The country that will need to undergo the largest adjustment of this type is China. And it is not clear that China is ready to undertake that transition.

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You have a point, though I think that shifting from export led growth in developing countries to domestic consumption of "tradables" could be a traumatic shift. In a way this is a return to the import substitution approach. It would be better in many ways though. If we look at what has been happenning in the real economy in the relationship between the U.S. and China we see Americans going deeply into debt buying products produced in the Lao Gai by forced labor. If you want more info on the Lao Gai check Harry Wu's book "Troublemaker" or the websites of Anti-slavery International or Human Rights Watch. This is not helping most people on either side of the exchange. There needs badly to be a better model for development: something more humane as well as more sustainable.

An incidental point, but I just happen to be reading Eric Hobsbawm's Age of Empire, 1875-1914, and funnily enough he suggests that the industrial working class was in fact a winner during the "Great Depression" of 1873-1895, with depressed prices (especially in agriculture) leading to increased real wages.

Great column and post, but I have a question. In the column you mentioned that it has entered conventional wisdom that large current account balances were a cause of the great crash. Can you direct me to an article that more thoroughly explains this? I'm guessing it has something to do with low savings rates tied into rapid increases in household wealth because of rising home prices, but is it that the large current account balance fueled a domestic residential imbalance, or did the imbalance arise from other factors? Perhaps this is a fairly simple macroeconomic question, but how were over-investment in non-tradables and a large current account balance connected?

One point that comes to mind when I hear China is its potential parallels to the former Soviet Union.

Here was Gorbachev trying to open the door to reform knowing full well the fundamental and systemic issues he had to fix. Despite his best efforts he opens up Pandora's box and segues to a rapid implosion of the entire system. The system just couldn't handle it.

Ferguson essentially argues that it wasn't so much Reagan/Thatchers' unwavering stance as much as top down self destruction (implosion) of the former Soviet Union that did it in.

China as it attempts to deal with its modern issues has to make sure it doesn't go down the same path.

James Conran makes a really good point: if real wages go up, this could see a new class meld, which, in a time that purports to have no class divides, could see the rise of a new lower-lower middle class. In the UK, at least, with credit hard to come by, I think we'll see a new class of people with no credit have more money to spend over the next couple of years. A nice collection of prognoses!

HE British parliamentary expenses scandal claimed its first ministerial scalp last night with the standing down of junior Justice Minister Shahid Malik.

Mr Malik stepped down pending an investigation after The Daily Telegraph revealed Britain's first Muslim minister had claimed tens of thousands of pounds for a second home while paying below-market rent for his main house.

The newspaper said Mr Malik had claimed pound stg. 66,827 on his London home over three years, while paying less than pound stg. 100 a week on a house in his constituency he designated as his main residence.

Prime Minister Gordon Brown has asked an independent adviser on ministerial interests, Philip Mawer, to investigate the claims, said a spokesman, adding that it was expected Mr Malik would return to his job if cleared.

"There have been accusations made in the past 24 hours against Shahid Malik, in particular that he received preferential rent on his main residence," said the spokesman. "Because that allegation would represent a potential financial benefit ... this could represent a breach of the ministerial code."

House of Commons Speaker Michael Martin was under growing pressure to step down at next year's general election for resisting a crackdown on MPs and expenses to concentrate on finding who leaked the data to The Daily Telegraph.

The Times labelled yesterday the British parliament's "darkest day" after a former minister, Elliot Morley, was kicked out of the parliamentary Labour Party for his abuse of expenses, and a Conservative MP stepped down from the opposition front bench over his claims.

Conservative MP Andrew MacKay may be ordered by his party to pay back more than pound stg. 100,000 ($200,975) in allowances he claimed by exploiting a system that allowed MPs to claim benefits to maintain a second home.

Mr MacKay and his wife, fellow Conservative MP Julie Kirkbride, own two homes. He designated one as his second home and she designated the other as hers, meaning they could claim allowances for both homes but were left with no primary residence.

EURO-zone economies shrank far more than expected in the first quarter — with Germany posting its worst performance since reunification — but in the US on Friday there were signs of improving consumer sentiment and a stabilising industrial sector.

Gross domestic product for the 16 countries using the euro contracted 2,5% quarter on quarter, or 4,6% year on year, the worst on record. Europe’s largest economy, Germany, fell 3,8%.

“It was a massive surprise just how weak the data were,” said HSBC senior currency strategist Paul Mackel.

Bankers and policy makers said central and eastern Europe faced at least another year of economic pain. They urged western European institutions to do more to help.

Ukraine said it needed more funds on top of an existing $16,4bn International Monetary Fund (IMF) bail-out.

Economic signals in the US were more encouraging. The mood of US consumers improved this month, and a widely tracked measure of consumer expectations was at its highest level since October 2007.

US factory output fell at a slowing rate, and machinery orders in Japan surpassed expectations, both suggesting global industry was at least starting to stabilise.

Energy and financial shares pressured Wall Street, and the Standard & Poor’s 500 index closed down 1,1%. US indices were lower for the week, as were European markets, despite a 0,5% gain on Friday.

Industry and consumer confidence surveys signalled a slowing rate of decline in recent weeks, and central bankers have talked up recovery hopes. Yet consumer-demand signals have been mixed at best.

The world’s number three clothing retailer, Sweden’s Hennes & Mauritz, raised hope of a consumer recovery with its first sales increase since last July.

But US retailers JC Penney and Abercrombie & Fitch suggested consumers remained leery of nonessential spending and were sensitive to prices. “Price consciousness is dictating shopping habits unlike anything I have ever seen,” said Abercrombie CE Mike Jeffries, whose company’s loss was wider than expected.

US credit card defaults rose to a record high last month, reflecting the millions of job losses since the start of the year. Citigroup, Wells Fargo and American Express posted double-digit loss rates.

General Motors will cut about 1600 dealers as it prunes operations ahead of expected bankruptcy. Bankrupt Chrysler took similar measures. Sluggish demand has limited companies’ pricing power: US consumer prices had their largest 12-month drop since 1955.

A US policy maker said Federal Reserve action pulled the economy back “from the edge of the abyss”, but a return to growth would take time as Americans sought a new balance between consumption and saving. Dallas Fed President Richard Fisher expected a “very slow slog”.

Fed chairman Ben Bernanke said on Friday investors seemed more willing to take part in a Fed scheme to revive lending.

Banks, at the epicentre of the crisis, still face pressure to raise capital. Barclays is in talks to sell prized asset management arm Barclays Global Investors of San Francisco for $10bn or more. It received “unsolicited interest” in other units after auctioning its iShares unit.

IMF chief Dominique Strauss-Kahn said recovery, which the IMF predicts is a year away, depended on the banks. “There is a lot do in cleansing the balance sheets. You never recover until the cleansing has been done.”

'Maintaining an undervalued currency has the upside that it subsidises the production of such goods; but it also has the downside that it taxes domestic consumption—which is why it generates a trade surplus.'

dani, could you please explain how undervaluation taxes domestic consumption? u mean since it makes imports expensive, hence a tax (disincentive) in such form.

But that should not have an impact on domestic demand for domestic goods?

Argentina - Argentina's president says her country's biggest airline has signed a contract to buy 20 planes from Brazilian jetmaker Embraer. President Cristina Fernandez says the aircraft will be the first new jets for Aerolineas Argentinas SA in 16 years. The airline was nationalized in December. She gave no other details in a televised speech, but the Telam state news agency said Thursday that Brazil's national development bank would loan Aerolineas $585 million to finance...

Japan's central bank on Friday upgraded its assessment of the world's second-largest economy, taking a cautiously upbeat stance that recession may be easing.

The Bank of Japan's eight-member policy board voted unanimously to leave its overnight call rate at 0.1 percent, a move that was widely expected. The low rate is in place to encourage lending and the flow of capital, but there is little room to cut it further.

But the central bank modestly upgraded its economic assessment. It said the economy was still deteriorating, but exports and production are beginning to level out. Previous assessments said the economy had been deteriorating significantly.

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This is a glimmer of good news for big names in Japan's corporate ranks such as Sony and Toyota, for which sales abroad are a major source of profit. Such companies have booked huge losses, cut workers and shut down plants as they feel the effects of a global economy mired in recession.

Hope for an end to the current malaise has come from other areas as well. Earlier this week, government data showed Japan's economy shrank at a record 15.2 percent annual pace in the first quarter, the biggest drop since the country began compiling such numbers in 1955, but the numbers also raised hopes that the worst is over.

The current administration is banking on elephantine spending packages to spark a turnaround. Prime Minister Taro Aso's latest $150 billion stimulus package includes incentives to buy energy-efficient appliances and cars, plus help for the unemployed and small businesses.

With interest rates near zero, the Bank of Japan has tried to shore up the balance sheets of the country's banks and other lenders. The central bank takes some financial risk off of such companies' books by buying up commercial paper, corporate bonds and even stocks.

On Friday, the central bank also said it would accept foreign bonds in foreign currencies as collateral from banks when providing credit for market operations, which could make it easier for such banks to raise funds.

Germany, the land of Goethe, Thomas Mann and Beethoven, has an unlikely pop culture hero: Donald Duck. Just as the French are obsessed with Jerry Lewis, the Germans see a richness and complexity to the Disney comic that isn’t always immediately evident to people in the cartoon duck’s homeland.
Disney

Comics featuring Donald are available at most German newsstands and the national weekly “Micky Maus”—which features the titular mouse, Goofy and, most prominently, Donald Duck—sells an average of 250,000 copies each week, outselling even “Superman.” A lavish 8,000-page German Donald Duck collector’s edition has just come out, and despite the nearly $1,900 price tag, the publisher, Egmont Horizont, says the edition of 3,333 copies is almost completely sold out. Last month the fan group D.O.N.A.L.D (the German acronym stands for “German Organization for Non-commercial Followers of Pure Donaldism”), hosted its 32nd annual congress at the Museum of Natural History in Stuttgart, with trivia and trinkets galore, along with lectures devoted to “nephew studies” and Duckburg’s solar system.

“Donald is so popular because almost everyone can identify with him,” says Christian Pfeiler, president of D.O.N.A.L.D. “He has strengths and weaknesses, he lacks polish but is also very cultured and well-read.” But much of the appeal of the hapless, happy-go-lucky duck lies in the translations. Donald quotes from German literature, speaks in grammatically complex sentences and is prone to philosophical musings, while the stories often take a more political tone than their American counterparts.

Whereas in the U.S. fans of Donald Duck tend to gravitate to the animated films, duck fandom in Germany centers on the printed comics published in the kids’ weekly “Micky Maus” and the monthly “Donald Duck Special” (with a print run of 40,000 copies), which sells mainly to adult readers.

Donald Duck didn’t always find Germany so hospitable. In the years following World War II, American influence in the newly formed Federal Republic was strong, but German cultural institutions were hesitant to sanction one U.S. import: the comic book. A law banning comics was proposed, and some American comics were eventually burned by school officials worried about their effects on students’ morals and ability to express themselves in complete sentences.

Whichever way you look at it, the announcement that Nick Griffin, the leader of the British National Party, might attend a royal garden party at Buckingham Palace is a milestone moment in British politics. For it marks another stage in the transformation of Britain's biggest far-right party from a past of street thuggery to the brink of electoral breakthrough. Griffin could next month become the party's first member of the European Parliament.

The real question is whether it has done that by shrugging off its neo-fascist antecedents and entering the extreme right of mainstream politics – or is it being done by the perpetration of long-running confidence trick upon the electorate? The answer to that lies in the one man whose personal writ runs authoritatively throughout the party. So has Nick Griffin really changed?

There can be no doubting the unsavoury background from which Griffin emerges. It is deep rooted in his family history. His parents met while heckling a Communist Party meeting in north London in 1948. Nicholas John Griffin, who was born a decade later, was as a boy reputedly given by his grandfather some of the more anti-Semitic literature of Oswald Mosley's British Union of Fascists. While at private school in Suffolk aged 13, he was reading Hitler's Mein Kampf and making notes in the margins. "Adolf went a bit too far," Griffin conceded in 2006.

In 22 years in Parliament I have opposed all pay increases for MPs that are out of line with the rest of the public sector. In 2001, along with about 60 colleagues, I opposed the 42 per cent increase in the additional costs allowance which is the source of so many of our present troubles. I do not seek to pretend to be holier than others. The truth is that just about all of us are vulnerable in the current climate.

However, the sight of the Telegraph's political correspondent, Benedict Brogan, on Question Time last week, pompously refusing to disclose his sources when no one was asking him to do so was almost too much to bear. What, he was asked, had his paper had paid the person who stole the now famous expenses disc. A minor matter maybe, given the wider issues at stake, but not an unreasonable question in this age of transparency.

The Daily Telegraph has never been above practising a little fraud on its readers. When I first visited Vietnam, in 1973, I was amazed to discover that the paper's Saigon correspondent, whose reports appeared almost daily under the byline John Draw, was in fact Nguyen Ngoc Phac, an officer working for General Cao Van Vien, chief of staff of the Southern army.

So blatant was the arrangement that Phac used to appear in uniform at the Reuters office to tap out his reports. It wasn't that his dispatches resembled the official line. They were the official line.

When I got home I raised the matter with the then Telegraph editor, the late Bill Deedes, but I couldn't get a straight answer out of him.

In 1976, after the fall of the fascist regime in Portugal, someone walked into the Ministry of Information in Lisbon and emerged with a file on a journalist who reported for the Telegraph from Portugal's African colonies, where fierce wars were raging. The file – a copy of which I still retain – showed he was in the pay of the Portuguese secret police.

True, under the editorship of Max Hastings and Charles Moore, the Telegraph enjoyed a period of respectability, but lately – having fallen into the hands of the Barclay Brothers – it has become little more than a broadsheet version of the Daily Mail. Indeed, many of the new masters, Mr Brogan included, were recruited from the Mail.

Under their tutelage, much of the Telegraph's political and economic reporting has become, frankly, doo-lally. My personal favourite among the many ludicrous stories that in recent years have adorned what passes for the Telegraph news pages was headed "Brown raised taxes to the highest level in 20 years". Pinch yourself and then ask "Who was prime minister 20 years ago?". Why, none other than the Telegraph's beloved Margaret Thatcher. And for how long had she been prime minister? Eight years. Good God, if all a Labour government managed in its first 10 years was to raise taxation to the level that it was under Mrs Thatcher at the height of her ascendancy, Middle England can surely sleep easy in their beds.

Among the many falsehoods that we poor, inadequate, despised representatives of the people have had to put up with over the years is the oft-repeated suggestion that when Parliament is not sitting we are all sunning ourselves in the south of France. (I have lost count of the number of times, on a sunny summer's evening, even coming down the steps of my office, I have been slapped on the back by a passing constituent remarking, "All right for you with your three months' holidays".)

More serious is the suggestion that we are all somehow pocketing the money we are given to employ staff and run an office. This is an old favourite with our most loathsome tabloids, but lately it has migrated. This, for example, was an ignoramus called Ian Cowie in the Money section of the Telegraph on 4 April: "Now that the average MP claims £135,600 a year for expenses – yes that's right, more than five times national average earnings – this means they avoid paying £54,000 a year tax which HMRC would demand from anyone else lucky enough to receive such payments."

Mr Cowie expounded on this thesis over the best part of two pages and returned to the subject last week. In what other profession would staff salaries, office rent, utility bills, the rent of photocopiers and so on be counted as income? In 22 years, not a penny of that money has ever touched my bank account.

Perhaps the most outrageous recent example of the growing culture of impunity when it comes to discussing alleged corruption by the political classes was the front page of the Daily Mirror on 31 March under a banner headline "THEY ARE ALL AT IT". The story, by one Bob Roberts, began "Greedy MPs pocket an average £144,176 in expenses on top of their bumper salaries, shock figures revealed yesterday..."

Actually, we are not all at it. The only place I have ever worked where they were "all at it" was Mirror Group Newspapers in the 1970s. There, at the end of the first week, my expenses were rejected by the man who was supposed to vouch for their accuracy on the grounds they were so low they would embarrass everyone else in the office.

very nice topic and from my point of view This crisis is going to be one of the lessonsfor us, learn to give up the unnecessary things, and take only what is necessary for our survival.
We live in a totally interconnected, global world now. We depend on each other for survival. If we take, we take it from someone else, or we deplete nature. With our present selfish, greedy behavior we slide into deeper and deeper problems all around.
We have to understand, that in such a closed integral system we can only survive if we unite, and work together making the well being of the whole our priority.
It does not mean we have to live on bread and water, our world can provide us with comfortable living circumstances, provided it is used and distributed the right way.
This is the purpose of this crisis, to make us understand the system we live in, and how we need to adjust our attitudes and relationships to each other.

advanced countries will not resume rapid growth anytime soon. With so many trillions of asset destruction, consumption growth will remain slow for a while, as will the process of finding another engine of growth to replace finance.

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